Resource tax undermined by billions in credits

The big four iron ore producers have about $6.4 billion in mining tax credits between them.

The Federal Government's mining tax raised only $126 million in its first six months and it is generous asset deductions, not falling commodity prices, that seem most to blame.

The $126 million the Minerals Resource Rent Tax (MRRT) raised in its first six months was way off the Treasury forecast of $2 billion, which itself was downwardly revised from an earlier forecast of $3 billion.

"The huge drop in commodity prices in the second half of last year had a dramatic impact on MRRT revenues," he told reporters.

Indeed, the benchmark Chinese spot iron ore price did slump from $US133.50 per tonne on the first trading day after the MRRT took effect to $US86.70 just two months later.

However, it was back up to $US144.90 by the last day of that six-month period, and spent only seven weeks below $US110 per tonne.

Most of the $126 million in revenue, according to the Tax Office, was raised in the second three-month period where prices were never below $US100 per tonne.

Those figures indicate falling commodity prices are only part of the story as to why the mining tax revenues missed forecasts so badly.

The other reason is revealed in the financial reports of the miners themselves.

Billions in tax credits

The mining tax allows companies to offset the value of their mines against the tax they have to pay, and the 2012 financial reports of BHP Billiton and Rio Tinto show that amounted to tax credits worth $644 million and more than $1.1 billion respectively.

They believe over the next few years they're not likely to pay any tax under that legislation.

Fat Prophets mining analyst David Lennox

Hancock Prospecting's freshly lodged 2012 financial report - submitted to the Australian Securities and Investments Commission (ASIC) six months late - shows it has an even bigger credit against the mining tax worth $1.16 billion.

Fat Prophets resources analyst David Lennox says those credits can be used to directly reduce miners' MRRT liabilities now and into the future, until they run out.

"Exactly as we saw with BHP, Rio and Fortescue, they [Hancock] actually booked a credit for the minerals resource rent tax for 2012 of $1.2 billion," he said.

"That means that they believe over the next few years they're not likely to pay any tax under that legislation."

However, Hancock does not have the biggest mining tax offset.

Fortescue Metals has repeatedly said it does not expect to pay any mining tax in the "foreseeable future", and a look at page 85 of its financial year 2012 annual report reveals why.

The company has estimated that it has an MRRT credit of almost $3.5 billion - a figure overlooked in coverage of Fortescue's results because it was buried so far down in the report, unlike BHP, Rio and Hancock, which included their mining tax credits in their profit and loss statements.

Fortescue's estimated tax asset brings the total mining tax credits of the big four iron-ore producers to almost $6.4 billion.

"Over future periods they're entitled to deductions because the values of their assets for tax purposes are deemed to be higher than the book value they use for their assets in their financial statements," observed Jeffrey Knapp, a University of New South Wales accounting lecturer.

What this means is that, regardless of commodity prices, these big mining companies have enough tax offsets stored to see them pay no, or little, federal mining tax for the next couple of years.

Once the tax credits run out, MRRT collections are likely to rise significantly, if the tax still exists in its current form in several years' time, and should iron ore prices remain historically high.

So far, from the publicly available profit reports, it is known that BHP Billiton paid $77 million in the first six months of the MRRT, and Rio Tinto and Fortescue paid nothing.

The amount of tax Hancock Prospecting paid will not be known until it submits its financial year 2013 accounts, due by October 31 this year.

Hancock's financial reports

However, Hancock's 2012 accounts were lodged with ASIC six months late, and its previous six financial reports were all lodged more than a year late, with the 2010 accounts well over two years late when lodged on Christmas Eve last year.

While, as a private company, Hancock is not obliged to file financial reports for the benefit of the market, s319 of the Corporations Act requires large companies to submit their annual report regardless of whether they are publicly-listed or not.

Hancock has not responded to questions from the ABC about why its reports were late, or whether it intends to file future reports on time.

They've paid $500 million of tax for the year to 30 June 2012. That's a strong contribution to the Australian economy.

UNSW accounting lecturer Jeffrey Knapp on Hancock Prospecting

The lack of MRRT payments does not mean the companies are not paying any taxes at all.

Jeffrey Knapp says Hancock Prospecting's accounts show its contribution to public finances.

"If you look in their financial statements you can see they've paid $500 million of tax for the year to 30 June 2012. That's a strong contribution to the Australian economy," he said.

That tax was out of a statutory profit of $3.27 billion for financial year 2012 - a figure boosted by the one-off recognition of the mining tax credit and a billion-dollar sale of Queensland coal assets.

Hancock's revenue ($2.31 billion) and its underlying profit excluding those one-offs (around $1 billion) were both down slightly on 2011.

David Lennox says they are likely to fall again this year.

"Certainly there's no doubt that we will see those revenue numbers perhaps falling again as a result of the lower [iron ore] pricing environment that we will see through [financial year] 2013," he forecast.

Mr Lennox says Hancock is still in good shape, despite the commodity price falls, but it may look at reining in costs that grew by almost a third to nearly $1 billion last year.

"They will be looking to cost cutting to certainly stimulate the bottom line and also probably some slowing down of capital expenditure in terms of projects that they were looking at that they will now delay to a point in the future," he added.

Media losses

Gina Rinehart's company also suffered a financial hit from the mining magnate's media ownership: in 2012 Hancock Prospecting booked a $222 million fall in the value of its "available for sale" financial assets, which are mostly shares that can be easily traded on the market.

Hancock looks likely to have more mixed fortunes on those investments this year.

The Fairfax shares held by Hancock fell to 55.5 cents by the June 30 record date in 2012 and, despite falling lower still during the current financial year, are now higher at 63.5 cents.

However, Mrs Rinehart's Ten Network shares will offset any Fairfax gains, falling from 50.5 cents on June 30 2012 to 30.5 cents currently.

At the current share prices, Hancock Prospecting holds about $78 million worth of Ten shares and $224 million worth of Fairfax stock.